Saturday, February 20, 2016

BSE Sensex and NSE Nifty 50 index chart patterns – Feb 19, 2016

Short covering, some amount of value buying and hopes of market-friendly announcements in the forthcoming budget may have triggered last week's rally in the stock market.

There was also a slight let-up in FII selling in equities. Their net selling, as per provisional figures, was Rs 2600 Crores - thanks to net buying of Rs 400 Crores on Thu. Feb 18. DII were net buyers of equity worth Rs 3700 Crores.

Sensex and Nifty gained more than 3% each on a weekly closing basis - their biggest weekly gains in 4 months - and pulled back to test resistance from their respective Jan '16 lows. 

Can the resistances be overcome, or will both indices resume their downward journeys? A lot will depend on whether budget announcements are able to meet or exceed already low market expectations.

BSE Sensex chart pattern

The daily bar chart pattern of Sensex pulled back to its Jan 20 '16 low of 23840, where it is facing resistance from its falling 20 day EMA. The reasons for a likely technical bounce were explained in last week's post.

In the chart above, green arrows have been used to indicate previous bottoms that acted as supports. Once these supports got breached, they turned into resistance levels (marked by red arrows) for subsequent up moves. 

Observant readers may see similar patterns near the 26300 level - supports turning into resistances. The reverse also occurs - resistances, when breached, turn into supports during bull phases.

Daily technical indicators have recovered from oversold conditions, but remain in negative zones and are not showing much upward momentum. RSI is showing positive divergence by touching a higher bottom while Sensex touched a 52 week low of 22600 on Fri. Feb 12.

Bears may use the pullback to sell. Sensex is likely to test the Feb 12 low, and even breach it if budget proposals disappoint the market. 

There is also a possibility - however slim - of the index forming an 'inverse head and shoulders' reversal pattern. The left 'shoulder' has already formed, and the 'head' is in the process of being formed. One has to wait about 5-6 weeks for the pattern to play out.

After dropping and closing below its 200 week EMA (not shown) last week, Sensex has pulled back to close above it. The threat to the long-term bull market has been averted - for now.

NSE Nifty 50 chart pattern

The following remarks appeared in last week's analysis of the weekly bar chart pattern of Nifty 50: 

"A close below the 200 week EMA is considered very bearish. But a single week's breach should not cause panic. Faint bullish hopes were kept alive as the index closed the week within the 3% 'whipsaw' limit below its 200 week EMA."

Nifty pulled back to its Jan '16 low of 7241, and in the process, closed more than 100 points above its 200 week EMA (not shown).

Weekly technical indicators remain in negative zones, but RSI and ROC are showing signs of upward momentum. MACD is still sliding down. Slow stochastic is muddling along the edge of its oversold zone.

Bears (i.e. FIIs) remain in control of the chart, and they are not showing any signs of relinquishing it.

Bottomline? Chart patterns of Sensex and Nifty have pulled back to their Jan '16 lows, and managed to close above their respective 200 week EMAs. The threat to long-term bull markets has been temporarily averted. Remain watchful and cautious, but don't give up on your investment plans.